There are many factors that could cause people to fall into a financial problem, from a layoff to an economic crisis. For example, the COVID-19 pandemic It has wreaked havoc in dozens of countries worldwide, including the United States. The stock fell sharply and then became quite volatile and unstable. The unemployment rate rose sharply on all continents, the health system was overwhelmed by the number of infections and consumption plummeted due to the loss of sources of income for citizens. It is in this context that it would be useful to know what forbearance means.
Given this scenario, it is normal for a person to be in a very difficult situation in which they do not know what to do. You have debts you can’t pay, you need the money to pay your rent and buy groceries, and you still can’t get a job. Just in emergencies like these, lenders may be forgiving, known financially as forbearance. But what exactly is this? Let’s see it!
What is forbearance and what does it mean?
When a lender allows a borrower to temporarily suspend payments on some type of loan, they are being lenient. This is known in the financial world as forbearance. Now, there are several types of forbearance; as well as situations in which it can be implemented. Normally, the forbearance is more common in student loans, but they are not the only ones in which it can be applied.
Note: From March 13, 2020 until September 30, 2020, federal student loan borrowers are subject to an administrative forbearance. This will allow citizens to temporarily suspend their monthly loan payments. Of course: if the citizen wishes and has a way to pay, he can do so without problems.
How does forbearance work?
The forbearance is more or less simple. Suppose you borrow money and then have difficulty paying it back. In that case, you can ask your lender to be lenient with you. The types of hardship weigh heavily at this point, ranging from a medical emergency to sudden permanent disability, job loss, temporary unemployment, a natural disaster, divorce proceedings, and the like.. If the lender believes that you are really going through a very bad time, they will grant you a deferment so that you can catch up on your payments in the future.
As you can see, there are two factors that characterize forbearance. The first, the sudden and unexpected nature of your emergency and, the second, that it is a kind of “forgiveness” or temporary negotiation. The forbearance period varies depending on the lender. However, it usually has a maximum of three years.
How can forbearance help you? Well, the lender could decide:
- Extend the term of the loan.
- Postpone loan payments.
- Reduce loan payments.
These terms must be negotiated between the lender and the borrower before the forbearance is granted.
Note: One of the most important characteristics of forbearance is that borrowers should note that they will have to pay any interest that accrues on their debt during the forbearance period. If they don’t, the interest will be added to the principal of the loan causing the amount to be paid to increase.
What are the types of forbearance?
Depending on the type of loan you have applied for, there will be several types of forbearance. Generally, there are three kinds of leniency:
Student Loan Forbearances
The student loans represent the category of loans most likely to receive forbearance requests. And it is that, the debt of student loans in the United States has become one of the most onerous on the continent, which means that many of the former students cannot pay their loan or have difficulty doing so.
This can increase in times of global crisis. After all, recent graduates have less experience than candidates who have been in the workforce for some time, and as a result, they may have a harder time finding a job. In fact, the latest statistics published on this matter -which are from 2013- indicate that 32% of student loans never had a forbearance note, while the rest did.
Of the total number of loans, 48% entered a forbearance period of 18 months and 20% were suspended for more than 18 months. In May 2018, more than 2.5 million former students requested a forbearance from their creditors.
Note: Former university students should be clear that during a forbearance period, they will still be responsible for paying the interest and that it is preferable to pay it month by month than let it accumulate. Think that the tolerance of your lender should not be a way to indefinitely postpone the payment of your student loan and that it is not a formula to be able to lower the installments or turn your loan into a more affordable one for your pocket. Forbearances should only be requested in an emergency.
Note: There are two types of forbearance for college students who paid for their degree through a student loan:
- The first is the discretionary or general forbearance. This is available to almost anyone with any kind of financial hardship. This kind of leniency should be your last resort.
- The second is the mandatory forbearance. Mandatory leniency occurs when a student, or rather former student, is in the National Guard and is on duty; participate in a medical residency or internship program; or if the monthly loan payment is more than 20% of your monthly income.
Mortgage Lending Forbearance
People who have a active mortgage on your home and are currently having financial difficulty paying it due to unexpected illness or other similar compelling reasons may be eligible for a forbearance from their lender. Banks and other financial institutions that offer mortgages understand that homeowners could find themselves in the middle of a very difficult situation that they could not foresee and that gives them Legitimate Reasons for Requesting Creditor Forbearance.
In this case, you should check with your lender if you meet the general requirements to request temporary forbearance, in addition to specifying how long the forbearance will last, how much the monthly mortgage payment will be reduced to and how much you will have to pay in interest. In this scenario, you may have to give in to the lender by accepting a higher interest rate.
However, he thinks that the forbearance -even at a higher interest rate than the previous one- would give you the opportunity to avoid foreclosure on your home. Also, it will not have a negative impact on your credit score and this is something very important to take into account.
Note: At the end of the forbearance period, you must pay the principal, interest, taxes, and insurance on your home as stated in your forbearance agreement.
credit card leniency
During the Great Recession of the years 2008-2009, the default rates of the Credit cards They almost reached the clouds. In fact, this factor increased to 10%, which, although it does not look that high, it really is. Recently, this default rate is rising again. This is mainly due to the effects of the coronavirus pandemic.
To find out which program is available, you should call or go to the bank and make an appointment with a credit counselor.